From: lessgovt@gmail.com   
      
   California Regulations Prevent Insurers From Accurately Pricing Wildfire Risk,   
   so Now They're Fleeing the State   
   by Ronald Bailey, 6.1.2023, Reason Magazine   
      
   Like a good neighbor, State Farm Insurance is warning Californians to stop   
   living and building in high wildfire-risk zones. That is the upshot of a press   
   release in which the insurer states that the company, as a "provider of   
   homeowners insurance in    
   California, will cease accepting new applications including all business and   
   personal lines property and casualty insurance, effective May 27, 2023." State   
   Farm is taking this step largely because the California Department of   
   Insurance's system of price    
   controls does not allow it and other insurance companies to charge premiums   
   commensurate with the potential losses they face.   
      
   Consequently, State Farm is no longer willing to sell new homeowner insurance   
   policies because the company calculates that it cannot cover potential losses   
   in the face of increasing wildfire risks, fast-rising rebuilding costs, and   
   steep increases in    
   reinsurance rates. Higher rebuilding costs boost the values of the houses and   
   businesses that companies currently insure.   
      
   Reinsurance is also a big factor in State Farm's decision. As part of its   
   system of insurance price controls, the California Department of Insurance   
   does not allow insurance companies to include reinsurance costs in their   
   premiums. Reinsurance is    
   basically "insurance of insurance companies" in which multiple insurance   
   companies share risk by purchasing insurance policies from other insurers to   
   limit their own total loss in case of disaster. And disaster did hit in the   
   Golden State. The insurance    
   companies paid out $13.2 billion and $11.4 billion respectively in 2017 and   
   2018 for fire damage claims resulting from those two catastrophic wildfire   
   seasons. More recently, reinsurers have increased their rates to take into   
   account large losses    
   stemming from events like Hurricane Ian in Florida and Russia's invasion of   
   Ukraine.   
      
   So, State Farm is declining to write new insurance policies in California "now   
   to improve the company's financial strength."   
      
   One additional complication is that private insurance companies are forced to   
   contribute to the state's backstop Fair Access to Insurance Requirements   
   (FAIR) plan. The FAIR plan is basically a high-risk insurance pool that offers   
   last-resort, bare-bones    
   coverage, chiefly for fire losses, to property owners who cannot obtain a   
   policy in the regular market. It was established in 1968, in the wake of urban   
   riots and brush fires, when the California Legislature required insurance   
   companies offering property    
   policies in the state to create and contribute to the plan. It is not   
   taxpayer-financed, and plan premiums are statutorily required to be   
   actuarially sound.   
      
   As private insurers increasingly refuse to renew policies, more California   
   homeowners are turning to FAIR plan policies. FAIR plan premiums have been too   
   low to cover the losses its customers have incurred with the result that the   
   plan is $332 million in    
   debt. In other words, the plan is not actuarially sound. This means that the   
   California Department of Insurance is likely to impose a special assessment on   
   private insurers to make up for the FAIR plan's losses. Private insurers   
   cannot pass along the    
   costs of the assessment to their policyholders. As California's largest   
   property insurer, State Farm would be on the hook for the largest share of any   
   such special assessment. The way to lower or eliminate the amount that a   
   private insurer could be    
   assessed is to limit the number of policies it sells or simply leave the   
   market altogether.   
      
   Insurance premiums, like all prices, are signals to consumers. In this case,   
   higher premiums indicate the existence of increased risks. Because of the   
   California Department of Insurance's price controls, homeowners have been   
   deprived of market signals    
   that could have steered them to building in less dangerous locales or   
   encouraged them to build more fire-resistant homes. As California homeowners   
   are about to find out, government-imposed market distortions cannot be   
   maintained forever.   
      
   https://reason.com/2023/06/01/california-regulations-prevent-ins   
   rers-from-accurately-pricing-wildfire-risk-so-now-theyre-fleeing-the-state/   
      
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